CENTRAL BANK FANATICISM: HELLO MR. CARNEY

In our last Weekend Notes we wrote about the upcoming Paris meeting on what has become almost a fascist obsession about the dangers of global warming more deceptively known as climate change.

Recently, the Canadian transplant and current head honcho at the stodgy old Bank of England, Mark Carney, jumped into the fray with a fiery, scaremongering speech worthy of a Pentecostal preacher on a sultry summer Sunday morning in the deep South. The problem with people like Mr. Carney is he appears to be playing the useful idiot role for climate change hardliners with his acceptance  nonpareil of conventional wisdom.

When Mr. Carney addresses his board of fellow governors perhaps few pay much attention. That would be somewhat understandable, the economic cellar is full of some pretty dry stuff. Such is not the case, however, when it comes to the current rage of global warming fanaticism. Some people take their homework seriously. Here's brief example with the site for those who choose to take the time. prienga.com/blog/2015/10/9/fact-checking-mark-carneys-climate-claims

In his speech London’s insurance community, Mark Carney, Governor of the Bank of England, asserted a series claims about climate change.   Some of these are widely accepted.  The climate does change.  The world has warmed.  Atmospheric CO2 has increased, half of the increment due to human activities. 

Beyond this, there is no consensus, and indeed, the available data in many cases directly refutes the Governor’s more extreme assertions.  There is no consensus that humans are the primary drivers of climate change.  As we can see, sea levels, for example, were rising well before the 1950s date Carney gives as the start of modern anthropogenic warming. 

Importantly, the increase in losses since the 1980s is more likely to reflect expanded insurance coverage, increasing payouts as a percent of losses incurred, and an increased number of assets with higher values placed in harm’s way.  Losses increases have not occurred due to increases in hurricane, tornado, flooding, drought or fire frequency or strength, at least not in the United States, which represents the lion’s share of insurance claims.  In many cases, either frequency or intensity of weather-related events has actually declined.  Sea level rise has not accelerated, not as measured by either satellites or tide gauges.  Sea level has been rising for well over 100 years, and continues on that pace.

Like so many other economists, Governor Carney seems to operate under the assumption that current CO2 levels are just on the edge of some catastrophic acceleration.  For some reason, 320 ppm of atmospheric CO2 is safe, but 540 ppm is not, because there is some precipice—an inflection point or boundary—between here and there.  The limit is not 1,000 ppm, or 5,000 ppm, or 42,448 ppm, but right here, right now.  A little more CO2, a trace more of a harmless trace gas, and we are doomed.

The climate is complex and the future uncertain.  It is possible the worst fears may prove correct.  Nevertheless, such an assertion is not supported by the historical data, not for US droughts, floods, tornados, hurricanes or fires.  But it does show up.  In politics.  If sea levels were 20 cm higher in New York and this contributed to the damage from Superstorm Sandy, well, any middling analyst could have predicted the rise back in 1940, just as we can predict today that sea levels will be one foot higher a century hence.  The failure was not of CO2 emissions, but squarely a failure of governance.  And that goes doubly so for the fate of New Orleans.  If Governor Carney wanted to make a constructive proposal, he should have called for Lloyds to create macro audits of risk zones and censure or refuse to insure jurisdictions where governance is not up to par.  If insurers had refused to insure New Orleans unless the levees were sound, they could have saved themselves $30 bn in payouts and probably twice that in losses.

As an analyst, I find Mr. Carney’s speech is truly dismaying.  For the Governor of the Bank to claim that climate change is leading to rapidly rising insurance claims is, at best, a critical failure of analysis.  As discussed above, insurance claims are a function of a number of factors, including the type and country of the weather event, as well as the extent of insurance coverage and payout ratios.  A hurricane in the US may see one hundred times the payouts of a major flood in India. Payouts will rise as a function of nominal GDP, as both inflation and the value and concentration of assets will play a crucial role in overall losses.  The specific path of a storm can also be decisive for global averages.   It goes without saying that a storm which strikes in Philadelphia, marches up the New Jersey coast, slams into the Manhattan and turns towards New Haven is going to cost a bundle.  That same storm hitting, say, rural Mississippi would cause a fraction of the monetary damages.  And this matters, because Superstorm Sandy caused more insured damages than all the leading weather events in Europe, Japan, and China combined.  Single events can move long-term global averages.

If the Bank missed this, it is not because the necessary data is hard to find.  Information on weather-related events is readily and publicly accessible on the internet.  Almost every graph I use above relating to hurricanes, tornadoes, floods and droughts comes from the US government itself.  Apparently, the Bank of England could not be bothered to consult the underlying climate data before making hyperbolic claims.  Thus, at best, the Bank was careless with data analysis.

A worse interpretation of events suggests that Mr. Carney was willing to blindly accept the conventional wisdom, the ‘consensus of scientists’ regarding global warming, without any will or curiosity to dig deeper and form a personal view.  One can only hope that monetary policy in the UK is not informed by such superficiality or passivity.  

The very worst interpretation is that Mr. Carney is in fact aware of the source data, but chose to make hysterical claims to promote a personal political agenda.  I cannot imagine a more ill-considered idea.  For those of us who consider central bank independence sacred, the appearance of a national bank taking sides in a highly charged political debate—and doing so with scant regard for the underlying data—will establish the Bank of England as partisan and the political opponent of conservative politicians.  Given that Janet Yellen, the Chairman of the US Federal Reserve Bank, hails from Berkeley, a hot bed of climate activism, should the Republican Party consider the Fed also its opponent?  If so, I can assure you, the Republicans will find some support to ‘audit’ the institution. 

At the end of the day, political neutrality is a pre-condition for central bank independence.  If a political party deems the central bank to be an opponent, then it will take measures to gain political control over the bank, with the result that monetary policy itself may become politicized.  If the Bank nevertheless feels compelled to champion a particular side in a political debate, its analysis must be water-tight and its communication, impartial. That Governor Carny violated both dictums is simply stunning and a huge blow to the prestige of the Bank of England.  It was a very bad call indeed.